IHT is often referred to as a voluntary tax. If you asked a client whether he would be willing to make the tax inspector a beneficiary of his estate, the answer is likely to be no. However, without planning, the government could potentially be the biggest beneficiary of an estate.

There are various rules and opportunities surrounding non-UK domiciles and spouses, however, this article is aimed at UK domiciled persons and is intended to provide an awareness of UK Inheritance Tax (IHT) and some of the useful reliefs, but is not an exhaustive representation of the position. Any reference to a spouse applies equally to civil partnerships.

Gifts

There are three main types of gift for IHT purposes. Those which are exempt, potentially exempt transfers (PETs) and chargeable lifetime transfers (CLTs).

PETs are not subject to IHT on initial gift. Outright gifts to individuals are usually PETs.

CLTs are chargeable in lifetime to a maximum of half of the death rate (20%) when the value is transferred, after taking into account exemptions and reliefs available. Most transfers to trust are CLTs. The tax and non-tax benefits of planning with trusts is not discussed here, but needless to say, they may be useful means for family succession planning and inheritance tax mitigation. I will be covering trusts in the October issue of tax.point.

Any transfer of value made in the seven years prior to death is taken into account when looking at the value of a person’s death estate. After three years have passed post gift, the IHT is tapered at 20% per annum, until the tax charge is 0% after seven years. It is important to note that taper relief only reduces the IHT arising on a gift chargeable in the death estate, and does not reduce the value of the gift actually made.

If planning involves a mixture of PETs and CLTs, it is generally more tax efficient to make PETs before CLTs, due to the tax charge in lifetime for CLTs on transfer. Where CLTs are involved, the look-back period could be as much as 14 years.

Spouse Exemption and Nil Rate Band (NRB)

IHT is paid on a person’s net estate, incorporating their worldwide assets. The current rate of IHT is 40% on the net taxable estate, above the IHT NRB, currently £325,000 (frozen until 2020/21).

Assets can be transferred to a spouse, IHT-free. Any unused NRB can be transferred to the surviving spouse, meaning the first £650,000 of an estate could be transferred IHT-free on second death.

The Chancellor announced in the Summer Budget his intention to introduce an additional transferable NRB for IHT, in respect of the transfer of a main residence to a direct descendant (a child, step-child, adopted child or foster child) and their lineal descendants. The additional relief will only be available on one property which must have been the deceased’s residence at some point during their life. Executors can elect which property should qualify if there is more than one in the estate. The main residence NRB will be introduced in 2017/18 at £100,000, rising £25,000 per annum until it reaches £175,000 in 2020/21.

Therefore, by 2020/21, there is potential for a NRB of £1,000,000 available on second death. Those who downsize or sell their home after 8 July 2015 will effectively be able to ‘bank’ the additional NRB for use against the remaining value of their estate where they pass a smaller home or equivalent value asset to a direct descendant.

For those with a net estate worth in excess of £2 million the main residence relief will be tapered by £1 for every £2 the net estate value exceeds that threshold. So a couple with an estate worth £2.7 million in 2020/21 will not benefit from this additional relief. It is not clear at this stage how other reliefs such as BPR, may interact with this tapering measure.

Business Property Relief (BPR)

BPR is a valuable exemption on the transfer of relevant business assets during life or on death. In order to qualify, the relevant business property must be held for at least two years. For an asset transferred within seven years prior to death to qualify in the estate calculation, it must also have qualified on the original gift, and must still be held by the recipient (subject to detailed rules).

Business property relief
100% relief is available on:	50% relief is available on:
A business, or interest in a business, Shares in an unlisted company	Shares controlling more than 50% of the voting rights in a listed company (50% is not sufficient) Land, buildings, or machinery owned and used in a business they were a partner in, or controlled Land, buildings, or machinery owned and used in a business and held in a trust that it has the right to benefit from.
Not available if:	Not available on assets if:
A business is not carried out on a commercial basis A business mainly deals with securities, stocks or shares, land or buildings, or in making or holding investments	Also qualify for agricultural relief Wasn’t used mainly for business in the 2 years before it was either passed on as a gift or as part of the will Isn’t needed for future use in the business If part of a non-qualifying asset is used in the business, that part may qualify for BPR.

Careful consideration of the Shareholders Agreement is needed to ensure that there is no binding contract to sell to an existing shareholder for example, as this would deny BPR, where the shares may otherwise qualify. It is possible to achieve the intended objectives outside of the Shareholders Agreement without affecting BPR.

Businesses should be reviewed in detail to establish whether they sufficiently meet BPR requirements. Examples of contentious areas for BPR include a holiday letting business, property management and property development (if there is also substantial letting and dealing). Mixed estates consisting of farming and letting are also a precarious area.

There are provisions around excepted assets which should be considered, as this will reduce the amount of BPR available. An asset is an excepted asset if it was neither used wholly nor mainly for the purpose of the business in question in the two years (or period of ownership if less) prior to the transfer or value, nor required at the time of the transfer of value for the purpose of the business in question. Assets such as cash are of particular concern so any working capital requirement within the business should be well documented. The excepted assets provisions are subjective, and so a detailed review of a company’s position is recommended.

Another common pitfall is director’s loan accounts which do not attract BPR. This has become a contentious point for those businesses who incorporated to crystallise their business value and avail of entrepreneurs’ relief when this was possible. What had previously been a fully qualifying business, now includes a sizeable non-qualifying asset. That said, there are ways to attract BPR, by converting debt to shares, for example. Careful structuring is required.

Agricultural Property Relief (APR)

APR is available on the agricultural value of agricultural property which is transferred in either life or on death. Agricultural property includes:

• Land or pasture used to grow crops or rear animals
• Stud farms for breeding and rearing horses and grazing
• Short rotation coppice
• Value of milk quota associated with land
• Farm buildings, farm cottages and farmhouses

Again, any property subject to a binding contract for sale is excluded.

For APR to be available the property must have been owned or occupied for agricultural purposes immediately before its transfer for:

• A minimum of 2 years if occupied by the owner, or a company controlled by them or their spouse or civil partner
• Or at least 7 years if occupied by someone else

Land let on tenancies prior to 1 September 1995 will only attract 50% relief, so there is the potential to uplift this to 100% by negotiating new tenancy agreements.

Farming cottages and houses should also be considered in context, as in order to avail of APR it must be demonstrated that they are character appropriate, and occupied for the purpose of agriculture, amongst other conditions. This can be a grey area but a valuable review exercise, as the whole market value can potentially attract 100% relief.

Windfarms should not be ignored. Whilst they can present some alluring income streams, the land used will no longer qualify for APR, and is probably worth more for the purpose of IHT valuation. BPR will also not normally apply as a windfarm is akin to letting and therefore investment activity.

Conacre

It would be remiss to cover BPR and APR without mention of conacre, a term distinctive to Northern Ireland. Conacre refers to land let by a land owner to a tenant for grazing of livestock or growing of crops. It had always been the case that in a death estate, conacre land attracted both APR on the agricultural value of land, and BPR on the development value, which would often result in total relief from IHT.

However, the well-publicised McClean case highlighted the distinction between investment and trade, and the importance of the mitigation of IHT on development values of agricultural land. The implications of the case mean that BPR on the development value of conacre land is no longer available. Conacre landowners should therefore consider their position and mitigation opportunities as soon as possible. There are various opportunities surrounding gifts, reversion to farming, or entering joint venture arrangements which may improve the position.

BPR Investment Opportunities

BPR qualifying investments are often considered after other IHT planning measures have been exhausted, or where the need to retain control of assets is required. Typically BPR qualifying investments, such as AIM listed and EIS qualifying shares, are higher risk from an investment perspective.

These types of investment are often used to avail of the replacement of business asset provisions (whereby if you reinvest the proceeds from a BPR qualifying asset into another BPR qualifying asset within three years of the original disposal) following the sale of a business in retirement, thus attracting immediate BPR cover, on otherwise exposed cash and assets.

Small Exemptions

Annual Exemption – each tax year, you are allowed an annual exemption of £3,000. If the previous year’s exemption is unutilised, you can carry it forward. For example, on a gift of £7,000, only £1,000 may be chargeable as a PET. Note that the current year’s allowance must be used before the previous year, and you can only carry forward an allowance for one tax year.

Small Gifts – there is also a small gifts exemption of up to £250. This exemption is unlimited in the number of people you can make gifts to, but you cannot exceed the exemption per recipient in a tax year. For example, you could make two gifts of £125 each to one recipient, but if you made a third to the same person in the same tax year, none of the gifts would be exempt, and would become PETs.

Marriage Gifts – gifts made in consideration of marriage can also be made up to £5,000 from a parent, £2,500 from a grandparent (of either party), and £1,000 from anyone else. Gifts exceeding the relevant amount will be a PET after taking into account exemptions available.

Gifts out of Income – if the transferor can demonstrate that a gift formed part of their normal expenditure, was made out of income, and left the transferor with enough income for them to maintain their normal standard of living, the gift will be exempt. It is advisable to keep a record to support gifts made with the intention of availing of this exemption, as there are many factors to consider in determining whether a gift will meet the criteria, including patterns of gifts, frequency, the nature of the gifts, the donee’s identity and reason the gifts were being made.

Charity and Politics

There is an unlimited exemption for any assets bequeathed to a recognised political party, or UK registered charity. There are specific rules around whether the gifts would qualify, and so you should review this carefully in line with legislation.

An additional potential benefit arises when considering a charity as a beneficiary. If at least 10% of the net estate value is left to charity, the IHT rate on the estate drops to 36%.

“Each case should be reviewed on its own merit to ensure that the right approach is adopted. It is important not to lose sight of a client’s aspirations, purely for tax saving opportunities. And of course, a valid will is a crucial part of the tax planning process.”

Sherena Deveney is Head of Private Client Services for EY Northern Ireland.

Email: sdeveney@uk.ey.com

Website: http://www.ey.com